Revised Criteria for Classification of Non-Company Entities for Applicability of Accounting Standards

‍Overview

Accounting standards, which offer a set of rules and criteria that organizations must adhere to while preparing their financial statements, are essential to the financial reporting process. These standards guarantee uniformity, transparency, and comparability in the financial data that organizations provide, benefiting a number of stakeholders, including creditors, investors, regulators, and the general public.

The Companies Act has primarily governed accounting practices for corporate entities in India. However, the business landscape has evolved, with a growing number of non-company entities, such as sole proprietorships, partnerships, and Limited Liability Partnerships (LLPs), playing a crucial role in the economy.

Recognizing the need for standardized financial reporting across all business forms, the Institute of Chartered Accountants of India (ICAI) issued criteria for the applicability of accounting standards to non-company entities long ago. Recently, ICAI revised these criteria to ensure that non-company entities, while being exempt from the comprehensive requirements of company law, still adhere to essential accounting norms fostering transparency and comparability in financial reporting.

‍Revised Criteria

Prior to the revised criteria, non-company entities were classified into four categories for the purpose of the applicability of Accounting Standards, viz., Level I, Level II, Level III, and Level IV.

• Level I entities: Large-sized entities
• Level II entities: Medium-sized entities
• Level III entities: Small-sized entities
• Level IV entities: Micro-sized entities

At its 433rd meeting on August 13–15, 2024, the Council reviewed and recommended revisions to the criteria for the applicability of Accounting Standards to non-company entities, effective for accounting periods starting on or after April 1, 2024.

Now, non-company entities are classified into two categories:

• Micro, Small, and Medium-Sized Entities (MSMEs)
• Large entities

Micro, Small, and Medium-Sized Entity (MSME)

A non-company entity qualifies as an MSME if it:

• Does not have its equity or debt securities listed, nor are they in the process of being listed, on any stock exchange in India or abroad;
• Is not a bank, financial institution, or insurance company;
• Has a turnover (excluding other income) not exceeding ₹250 crore in the immediately preceding accounting year;
• Does not have borrowings exceeding ₹50 crore at any time during the immediately preceding accounting year; and
• Is not a holding or subsidiary of an entity that is not an MSME.

A large entity is defined as a non-company entity that does not meet the criteria for MSMEs.

Applicability of Accounting Standards

• ‍Large entities: Required to fully comply with all Accounting Standards.
• MSMEs: Certain exemptions and relaxations     are provided
  • AS 3, AS 17, AS 20, and AS 24: Not applicable in their entirety.
  • Relaxations/exemptions are also provided for certain requirements of AS 10, AS 11, AS 15, AS 19, AS 22, AS 26, AS 28, AS 18 and AS 29.

Conclusion

The new classification replacesthe 2021 criteria and mandates clear financial disclosures. It aims to simplify compliance for MSMEs while ensuring transparency and comparability in financial reporting.